U.S. Public Policy Creation in Response to the Financial Crisis of 2007-2008

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Abstract

Crises can have significant effects on the method of policy creation and on the content of the resulting policy itself. This paper investigates the method of policy creation employed in response to the financial crisis of 2007-2008. In particular, this paper looks at the creation and implementation of the Dodd-Frank Act that attempted to address the causes of the crisis and minimize the likelihood and severity of future crises. By using a rational choice theory and a transaction cost analysis framework to investigate the actions taken by political actors as they responded to the unfolding crisis, this paper investigated the method of policy creation and the motivations that determined it.

A close reading of the actions of the legislative branch during the crisis and post-crisis period investigating whether the actions were consistent with the results predicted by delegation theory literature found considerable support for the abdication hypothesis during this crisis. It also became apparent that a few key constraints including time limits and consultation requirements were used extensively by congress during this period to control the actions of agents that were delegated power whereas some other sorts of constraints. By way of comparison, other constraint types were used sparingly. Congress also appears to have had specific motivations for the choice of agent to delegate to which were present for most of the acts of delegation. These included ensuring agency independence, ensuring coordination, leveraging agency expertise, and ensuring constant and long-term attention to an issue.

Along with congress’ explicit delegation of power to the administration, there were considerable amounts of implicit delegation in which executive branch actors asserted powers that were not explicitly delegated. The instances of implicit delegation decreased later in the crisis as the focus of policy creation shifted from mitigating the current crisis to forestalling future crises.

During the crisis, the president primarily relied on the power to persuade and largely avoided using executive actions to create policy. In addition, minimal power and authority was delegated by congress directly to the president during this financial crisis.